Segmentation and targeting

Segmentation is a business process that enables a firm to evaluate the attractiveness of each
group (segment) and select those segments that it is able to serve effectively and
profitability.

Three fundamental factors provide the conditions that create the opportunity for a firm to
segment a market successfully.

1. Heterogeneity of customers’ needs and wants

2. The customers need to integrate into a cluster with similar needs with others groups.
3. The overall costs of serving customers in a segment must be equal to or less than the
price there are willing to pay, even if those costs are higher than the cost of serving
an average customer.

The seller provides this extra customers value, it may able to charger a higher price for
the more customized products; it also may produce competitive pressures by making it
more difficult for other manufactures to tailor better offering to meet the segment’s
needs.

The segmentation, targeting and

positioning approach

Segmentation is best viewed as the

first step in the three-step process of
segmentation, targeting and
positioning (STP).

In essence STP marketing offers the

promise of a better fit between a
companies offering to a customer and
what the customer really values.

Firms use segmentation and the STP

process to address a wide variety of strategic and tactical challenges. In each case, they
must first understand the potential responses of each market segment to proposed
strategies and apply them, possibly differently to each segment.

Segmentation analysis

To answer management questions such as these, we proposed a marketing engineering

segmentation model. The market segments identified by the model ideally satisfy three
conditions: homogeneity/ heterogeneity, parsimony, and accessibility.

A segmentation model requires a dependent variable (should describe why customer

respond differently) usually called a segmentation basis, and independents variables,
or segment descriptors (help markers deliver different offerings to various customer
segments) and the diction between this variables depend of the reason for conducing the
segmentation study.

The main problem with these types of segmentation schemes is that they are based on
the needs of the company, not the need of the customers, so there are unlikely to result
in produce or marketing programs that bets appeal to customers. Ideally, to be most
effective, firms should identify segments using basis variables, particularly the observed
or likely actions for customers.
 The STP Approach

Segmentations consists of two phases:

 Phase 1: segment the market using basis variables

There are three types of segmentation methods (a priori segmentation- firms
can directly segment customers according to their observable characteristics,
assuming such criteria are related to different in their underlying needs.
Traditional segmentation methods- to segment customers on the basis of a
single composite measure developed form a set of observable characteristics.
Latent class segmentation- is that customers belong to groups that differ in
ways that cannot be described just in terms of observable mean different
between segments.
Step 1: the firm explicitly outlines the role of market segmentation in this
strategic.
Step 2: requires selecting a set of segmentation variables.
Step 3: the company choose the mathematical and statistical procedures to
aggregate individual customers into homogenous groups or segment.
Step 4 and 5: the firm must make two crucial decisions: specify the maximum
number of segments to constructs according to the segmentation variable and
search across those segments to determinate how many to target.
Therefore, firms must decide in the number of segments to target using both
statistical criteria and managerial judgment.
 Phase 2: describe the market segments identified using variables that help the
firm understand how to serve those customers, how to talk to these customers,
and buyer switching costs (costs associated with changing produce or suppliers)

Two general types of variables are available for this purpose: those that outline
broad market characteristics and those that provide insights into serving one or more
segments.
 These variables categorize the segments in the market and thereby reveal actual and
potential customer, clarity their purchase motivations, and indicate how firms
should communicate with them.

Many combinations of variables can be used to describe a market. In determining

their strategy, firms should select variables that help:

 Measure the size and purchasing power of the segments.

 Determine the degree to which they can effectively reach and serve the
segments.
 Develop effective programs to attract customers.
Properly implemented, this approach leads to readily distinguishable segments.

Targeting consist of three phases:

 Phase 3: evaluate the attractiveness of each segment using variables that
quantify the demand levels and opportunities associated with each segment, the
costs of serving each segments, the cost of producing the offerings that customer
want, and the fit between the firms core competencies and the target market
opportunity. Many firms have
Found it helpful to start with nine measures grouped into three broad factors, to
evaluate the attractiveness of a segment of customers.
1. Pertains to the size of the segments and its growth potential.
2. Relates to the structural characteristics of the segment and includes four
criteria: competition, segment saturation, protect ability, and environment
risk.
3. Product-market fit, includes criteria.

Many companies have tried to grow but failed by pursuing a market segment
that offers high ROI but a poor fit with the firm’s current capabilities

 Phase 4: select one or more target segment to serve on the basis of their profit
potential and fit with the firm’s corporate strategy; determinate the level of
resources to allocate to those segments.

After developing the criteria to evaluate the attractiveness of various market

segments, firms must select the segments to serve.

They have five basic options: Concentrate on a single segment, Select segments
in which to specialize, provide a range of offerings to a specific segment,
provide one offering to many segments, and Cover the whole market (all
offerings to all segments).
A procedure to implement this process uses the following six steps:

1. Specify drivers of each dimension.

2. Weight drivers

3. Rate segments on each driver

4. Multiply weights by ratings for each segment.

 5. View resulting group.

6. Review/sensitivity analysis.

 When a company targets only its most attractive segment, it concentrates all its
resources on serving a single group of customers. This focus should enable the
firm to understand and serve the needs of this segment effectively. However,
such concentration also entails a price: The Company has exposed itself to high
risk by putting all its eggs in one basket.
 Phase 5: Find and reach targeted customers and prospects within targeted
segments in a variety of ways.
Three strategies have proven successful for identifying specific customer’s
whose values and needs do not correlate well with easy-to-gather identifiers.
Customer self-selection (In this case, the customer and the company reverse
roles. The company offers a range of products and services that fit the needs of
different target segments, and customers sort through this assortment to choose
the offering that best fits their needs).
Scoring/classification methods (To narrow the focus, discriminant analysis or
CART(Classification and Regression Trees) analysis identifies a small subset of
variables that can be used to assign customers to segments. These methods
generate rules for scoring each customer on the basis of observable,
discriminating characteristics; the resultant scores help assign customers to
segments.)
Following these phases, the firm must identify a positioning concepts for it
products and service that attracts target customer and enhances it desired
corporate image.

Segmentation Research: Designing and Collecting Data

We focus on a typical formal segmentation research study that collects primary

source data. Such a study consists of four Key steps:

1. Develop the measurement instrument: What information needs to be collected,

and how should it be collected
2. Select a sample
3. Select and aggregate respondents
4. Analyze the data and segment the market: What statistical procedures will
segment (potential) customers and describe aspects of their characteristics or
behavior that are crucial to serving their needs?

Developing the measurement instrument

Measurement instruments for segmentation studies usually attempt to collect several

types of data:

 Demographic descriptors: such as age, income, marital status, and education

(consumer side) and industry classification, size (number of employees or sales),
and job responsibilities (BtoB side)
 Psychological descriptors, such as activities, interests, and lifestyle.
 Demand, including historical purchases or consumption and anticipated future
purchases.
 Needs, whether stated or in terms of customer value
 Attitudes, pertaining to products, suppliers, purchase risk, or the product adoption
process.
 Media and distribution channel use, such as the types and amount of media used
and where products and services are typically bought.

Data collected in a segmentation study usually are structured into a data matrix, in
which the columns correspond to the variables measured, and each row contains the
responses of one respondent.

Updating and refreshing the database

Segmentation data age quickly, and a segmentation research program is not complete if
it lacks a plan for monitoring and refreshing the database. Segmentation is an ongoing
process, not an individual, one-time study, and regular market monitoring and updating
are essential for the success of this process.

Forming and profiling segments

 We have argued that meaningful segmentation should satisfy three managerial criteria:

1. the market should be heterogeneous

2. segments should be accessible
3. The segmentation should be cost effective to implement.

Our suggested segmentation approach attempts to satisfy these three criteria on the
basis of three related technical criteria: homogeneity (segment have similar needs and
values), identifiability (it is a measure of accessibility), and parsimony (how well the
segmentation scheme is developed with respect to the homogenous and heterogeneous
segments)

Traditional Segmentation

Cross-validation with different methods helps managers determine which relationships

and segments are most substantive

Five steps pertain to applying traditional segmentation methods:

1. Reduce the data

2. Develop measures of association. . Similarity measures fall into two categories,

depending on the type of available data: Scaled data, use distance-type measures,
whereas nominal data use matching-type measures.

3. Identify and remove outliers.

4. Form segments (The input to cluster analysis is the set of distances or measures of
association discussed previously. There are two basic classes of clustering methods:

 Hierarchical methods: Build up or break down the data row by row.

 Partitioning methods: Break the data into a pre-specified

The steps the Agglomerative methods: At the beginning, each ítem is its own cluster.

 Join the two items that are closest on some chosen measure of distance.
 Next join the next two closest objects, either by joining two
 Items to form another group or by attaching an item to an
  Existing cluster.
 Repeat step 3 until all items are clustered.
Agglomerative methods also differ in how they join clusters.
 Single linkage clustering: used most often to identify outliers.
 Complete linkage clustering: all items in the new cluster formed
By joining them are no farther apart than some maximal distance.
 Average linkage clustering: The distance between two clusters A and B equals the
average distance between all pairs of items in the clusters, in which one of the items in
the pair is from cluster A and the other is from cluster B.
 Centroid clustering: The distance between two clusters is typically the Euclidean
distance between their centroids (or means).
 Ward's method: Clusters form on the basis of the change in the error sum of squares
associated with joining any pair of clusters.
5. Profile segments and interpret results (The idea behind cluster profiling is to prepare
a picture of the revealed clusters based on both the variables used for clustering
(segmentation bases) and those used to identify and target the segments
(descriptors).

Targeting Individual Customers: the

company usually can use one of three
methods:

1. Demographic sorting: means that a firm

arbitrarily selects a target list, using some
customer characteristics like age, income, or
the like, depending on the product category.

2. RFM (recency, frequency, monetary value)

modeling: (R)- buy again. (F)-frequently are
morelikely. (M)-Customers who have spent
the most money in total (over some planning
period) are morelikely to buy again (M).

3. Choice modeling:
 ABB loyal: Customers for whom the probability of choosing ABB was significantly higher than
for any other competitor. Competitive: Customers whose probability of choosing ABB was
highest but not by a statistically significant amount relative to the probability for the next-best
alternative. Switchable: Customers who preferred a competitor to ABB but for whom ABB was
a close (not statistically significantly different) second choice. Competitor loyal: Customers
who preferred a competitor to ABB by a statistically significant amount.

Real-time targeting of online customer

 Referral source for the respondent’s visit to the website

 Geographical location of respondent
 Time of day of visit.
 Device used to access the website
 Behaviors
Implementation Barriers and Solutions
Across vast numbers of segmentation studies, the barriers to success tend to fall into
three categories: front end (, research/analysis, and implementation.

Market Segmentation and Segmentation Strategies

Millennial: 840 million of the worldwide population (18 to 24 years: age)
Their high connectivity and influence on other age groups make it especially important
for marketers to pay close attention to how Millennial are likely to respond to new
products and services.
For many products, age is a factor that drives certain customer needs.
Needs-Based Market Segmentation
Millennials are a lifestyle segment that is defined by its age. In this case, their
particular stage of life creates certain needs for creativity, identity, and fun. The needs
of Millennials are unique and driven by age-related outlooks and behaviors.
The market segmentation process should begin with the benefits that customers are
seeking in order to solve a particular customer problem. Because different customers
seek different solutions for the same problem, our first challenge is to identify and
understand the various customer needs that drive product consideration and preferences.
Needs-based segments: Knowing the factors that differentiate one segment from
another helps us identify the segments.

Customer Needs, Price, And Product Benefits

The purpose of needs-based segmentation is to offer product benefits that satisfy the
needs, including price, of different sets of target customers. Or, with a multiproduct
segment strategy, various products are designed for the needs of different segments,
each of which has target customers who differ meaningfully in the product benefits they
desire and the price they can afford.
Customer Needs: Understanding customer needs is the first step in successful market
segmentation. Both consumers and businesses have market needs, but the factors
influencing their needs differ in important ways. Understanding why customers have
different needs is helpful in determining how to divide a market into useful needs-based
market segments.
Forces That Shape Consumer Market Needs:
Consumers differ in a great many ways. Although many factors contribute to these
differences, three primary forces shape the needs of consumers.

Forces
That Shape Business Market Needs

Needs-Based Market Segmentation—Process

Understanding customer needs is a basic tenet of market-based management. Although
demographics, lifestyle, and usage behaviors help shape customer needs, they are not
always the best ways to identify groups of similar customers. A business groups its
customers according to their similar needs and then determines which of the many
demographics, lifestyle forces, and usage behaviors make each group distinct from the
other groups. In this way, a business allows customer needs to drive the market-
segmentation process, and then the business identifies the unique combination of
external forces that shape each segment. This approach reduces the possibility of an
artificial segmentation of the market by a combination of demographics and usage
behaviors that are not key forces in shaping customer needs.
The Demographic Trap
Given the strong role that demographics, lifestyle, and usage play in shaping customer
needs, it seems logical to segment a market on the basis of these differences.
Heterogeneous makes more sense to start the market-segmentation process by grouping
customers on the basis of similar needs.
Needs-Based Market Segments
To illustrate the importance of needs-based segmentation, consider again how we might
segment the market for investment services:
It would not take much for a financial adviser to figure out which type of investments
would best suit each segment of investors. But on the basis of needs alone, we do not
know who these customers are. The main benefit of needs-based market segmentation
is that the segments are based on specific customer needs. The main disadvantage is
that we cannot identify in advance the individual customers who would fall into each
segment. We need to determine the observable demographics and behaviors that
differentiate one segment from another in order to make the needs-based segmentation
actionable.
Segment attractiveness:

Market demand: To assess market demand we consider the present size of the segment, its
rate of growth, and its market potential. Market size, growth rate, and growth potential all
influence a business’s prospect for improved performance. A first step in assessing segment
attractiveness is to determine the extent to which these key market forces contribute to the
attractiveness of the segment.

Competitive Intensity: Numerous competitors and relatively low barriers to entry also
diminish the attractiveness of a segment because these conditions make it more difficult to
achieve market share and margin objectives. In addition, in a segment with many substitute
products and limited product differentiation, margins will be further compressed and profits
reduced. An attractive segment is one with relatively few competitors, minimal price
competition, few substitutes, and high barriers to competitor entry.

Market Access: To be attractive, a segment has to be accessible. The first requirement is

having access to channels that reach target segment customers. Accessing a market also
requires that the core capabilities of a business fit well with the needs of its target segment.
Segmentation Strategies
 Customer Relationship Marketing

The goal of customer relationship marketing is to develop a long-term customer

relationship that benefits both the customer and the company.

Customer relationship marketing (CRM) is a range of one-on-one relationship

marketing programs based on the level of company and customer value.

Customer relationship
management is a high-
level CRM program for
developing ongoing
individualized relationships
with certain customers
when both company and
customer value are high
enough to warrant this level
of marketing effort.

Customer Value versus

Company Value

Customers achieve greater customer value when the overall perceived benefits they derive
from products, services, and brand exceed by a meaningful margin the cost of obtaining
these benefits. CRM attempts to create additional customer value through personalized
communications, extra services, customized products, and special price offerings.
Companies view value in more economic terms.

CRM requires a higher level of marketing effort and expense, so the company must be
certain it is warranted before undertaking it. When both customer value and company value
are favorable, a business can justify a one-on-one CRM marketing program. It is possible
for customers to migrate in customer loyalty and profitability and thereby receive different
CRM programs over time. A mass-personalization CRM program or a mass-customization
CRM program could increase the purchases and profitability of some customers to a point
at which a customer relationship management program of individualized customer services
would be developed for those customers to further build their loyalty.

Database Marketing

At the core of customer relationship marketing is database marketing. Each customer is

treated as unique in CRM, and the goal is to build a more personal relationship between the
business and the customer. The only two differences in the three basic kinds of CRM
programs are the level of company effort and the level of customer benefit. To determine
how much effort a customer deserves, a business must have enough data to know each
customer’s individual needs, buying behavior, and individual product preferences.

Without a solid commitment to serving individual customer needs, these businesses can fall
into a technology trap: Many millions of dollars have been wasted in developing
technological approaches for marketing to customers without first strategizing a CRM
program. The amount of customer data that is required depends on which CRM
strategy will be used.

The overall goal of CRM is to serve customer needs as much as possible, subject to the cost
of serving these needs (extra marketing and sales expenses), in light of the results
(customer loyalty and long-term customer profitability).

Mass Personalization

The first level of customer relationship marketing is a mass-personalization strategy that

recognizes individual customers by name, needs, and buying behavior. In order to
implement this strategy, a business’s database marketing system must be able to track
individual customers and their buying history, segment needs, and segment value
proposition. This information is then used to develop personalized marketing
communications for target customers.

Mass Customization

Mass customization allows a company to do this because the marketing mix is customized
to the level of individual customer product preferences, extended services, and prices. Mass
customization allows each customer to build a custom product to meet that customer’s
specific needs, personal constraints, and price considerations.

The use of mass customization essentially allows customers to become their own
individual market segments. This is good for the customer as well as the business, because
even the same customer, as we have seen, may have different needs over time.

The whole point of mass customization is to let customers “build their products” according
to their individual needs and price sensitivity. Mass customization combines the advantages
of a niche-segment strategy with the breadth of opportunity that is available with multi-
segment marketing strategies.

Customer Relationship Management

The ultimate goal of a customer relationship management program is to build one-on-one

customized relationships between a business and individual customers.

The first step in building a successful customer relationship management program is to

identify the level of company value and the level of customer value for each customer. A
database marketing program is an essential tool in developing this understanding, but
customer relationship management is much more than just technology.

Outlined here are four steps that are critical to the success of any customer relationship
management program.

Step I: Qualify current customers for customer relationship management on the basis of
attractive levels of potential customer value and company value.

Step II: Understand individual customer needs, product preferences, and usage behaviors.

Step III: Create individualized customer solutions based on the customer’s unique needs
and establish customer touch points that will serve in building and sustaining the customer-
company relationship.

Step IV: Track customer experiences and all aspects of customer satisfaction to ensure that
high levels of customer satisfaction and customer loyalty are achieved.
An important concept in customer relationship management is customer touch points.
Every interaction with a customer or a potential customer is a touch point. Customer touch
points include in-store interactions, web sites, voice mail systems, and direct-mail
advertising, mass e-mail messages, order desks, return counters, and service calls. Indirect
customer touch points are less obvious but sometimes even more important in turning
potential customers into actual customers. These are often informational contacts, such as
news articles and word-of-mouth advertising. They are powerful forces in shaping the
beliefs and attitudes of potential customers toward the business and its products and
services.

At every point of contact—before, during, and after a sale—a business’s communication

affects its relationships with customers and potential customers. The way a business
manages each customer relationship from the first touch point determines the long-run
profit potential of that customer.